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ALBUQUERQUE — Gov. Bill Richardson isn’t the only one who probably regrets ever hearing the letters CDR.
CDR Financial Products Inc. is the Beverly Hills-based financial service firm that is the subject of the federal investigation that derailed Richardson’s nomination as secretary of commerce. The Los Angeles Times reported Tuesday that 20 municipalities are now suing CDR on the grounds that it advised them to make deals with banks that paid kickbacks to the firm.
A New Mexico Independent survey of news reports from around the country shows that CDR gained business with governmental entities via entertaining and close connections with major investment banks such as JP Morgan and Bear Stearns.
While Richardson and David Harris, the former executive director of the New Mexico Finance Authority have denied any wrongdoing, federal law enforcement officials are probing CDR’s dealings with Democratic officials in several states. It is alleged that some of the officials took contributions from CDR and gave work and/or seats on boards and commissions to the firm’s founder, David Rubin.
In 2004, when CDR was looking to do business with the city of Philadelphia, it gave Superbowl tickets and limo rides to a Democratic fund raiser — whose date for the game was Philadelphia City Teasurer Corey Kemp. The pair flew to Los Angeles in a private plane, stayed in a fancy hotel and took a limo to the game, mostly on CDR’s tab, according to an October 2006 story in Philadelphia Magazine.
Only 16 days after the game, Bloomberg reported that “Kemp [said] that city Finance Director Janice Davis agreed to ‘move fast forward’ on a $150,000 swap advisory contract for CDR.” Although the indictments didn’t specifically mention CDR, they did mention the company’s gifts to Kemp, apparently in return for work. In the end, Kemp was convicted on 27 counts of fraud and extortion and sentenced to 10 years in prison.
The indictments against Kemp came in June 2004, the same month that CDR donated $75,000 to Richardson’s Si Se Puede! Boston 2004 political action committee, but a few months after CDR had been selected to do work for the finance authority. But the work came without a formal contract.
“I think it might have been JP Morgan who recommended them,” Bill Sisneros, executive director of the NMFA, told The Santa Fe New Mexican.
JP Morgan and CDR also worked together to advise Jefferson County, Ala., on municipal bond debts. But that didn’t work out so well, either. The county ended up paying firms, including Bear Stearns and JP Morgan, $120 million in fees on bond swap deals, which the county’s current adviser says was $100 million too much. Interest rates soared, the deals went sour, everyone’s being investigated and the county is now on the verge of a bankruptcy. Earlier this month, a federal grand jury handed down three indictments and the mayor, who was president of the county commission at the time of the deals, was arrested on charges of taking kickbacks on the deals.
Kyle Whitmore, a staff writer at Birmingham Weekly who has been covering the story, said in a phone interview that when it comes to the county’s financial woes, there’s plenty of blame to go around.
We’re on the precipice of bankruptcy and a lot of that is because our public officials were looking the other way, out of laziness or worse. While their swap advisors, including CDR, were telling them that these were good deals, I don’t think anyone ever explained what was in the fine print and it came back to hurt them in the end. … CDR should have been the ones sounding the alarm bells for us. Everyone thought [the deals] could do no harm but yeah, well, we learned the hard way.
Other cities have also learned hard lessons from CDR and municipal bond deals.
In 2004, the Internal Revenue Service informed the city of Fargo, N.D., that it was investigating problems with nearly $50 million in bonds that were supposed to pay for a water treatment plant. At risk was the bond’s tax-exempt status and millions of dollars in interest. According to Bloomberg, the IRS pointed the finger at Bear Sterns and CDR, which had worked together on ways of sharing profits on municipal finance deals. But apparently they were a little too creative; the IRS said the deal could have ended up costing Fargo $3 million.
Today, folks in Fargo who were involved in the deal and its aftermath are reluctant to talk about it.
“We were involved in a yield-burning transaction and CDR was one of the parties to that transaction, but it has since been settled with the IRS,” Kent Costin, finance director for the city of Fargo, told NMI Monday. Costin refused to comment further.
“As I recall, the city’s bond counsel said, ‘We don’t think it’s OK,’ so they went to another counsel who advised them on that,” said a source familiar with the case. “There were warning signals all over. If you’ve got to switch counsels, then you should have known,” the source told NMI.
When the dust settled, the city ended up owing the IRS $1.7 million. But the city only paid part; most of the money was paid by “third parties involved in the bond sale,” reported a Fargo newspaper (subscription only). Because the details of the settlement were secret, exactly who paid how much is not known.
Harrisburg, Pa., and Johnson City, Tenn,. went through similar dramas.
“In all three cases, which together account for $105 million of bond issues, the IRS said it was concerned about the relationship between Bear Stearns and CDR,” Bloomberg reported.
Why didn’t New Mexico hear the warning signals? Well, maybe state officials should have, but the investigations and lawsuits surrounding CDR didn’t start erupting until 2004, just after the deals here were done.
Also, observers say, municipal bond finance issues are difficult for most people to understand. News outlets don’t generally cover the intimate details because they’re not interesting until they go wrong.
“The newspaper here got into it a little bit, but then got out because they thought, you know, nobody understands this,” a former Fargo city commissioner said Monday.
